The Mises Institute monthly, free with membership
Volume 14, Number 7
A year ago January--what a moment!--the two parties were in a
tax cut bidding war. Each side was attempting to gain political
advantage by trumping the other guy's proposal. Everything was on
the table: capital gains tax cuts, income tax cuts, inheritance
tax cuts, and every manner of tax credit.
Suddenly, everyone stopped cold. What about revenue
neutrality, the sacred doctrine that government revenues can
never go down? Budget committee head John Kasich called a
time-out. Congress won't cut taxes, he said, until cuts are "paid
for" with spending reductions.
Thus ended the Republican revolution. What followed was 18
months of haggling about projections, assumptions, and base
years, but still no tax cuts. The next time the subject of taxes
came up, it was in the context of an overall budget agreement
that Clinton was foreordained to veto.
The Republican were not even able to hold Clinton to his word
on small items like the per child tax credit. Everyone in
Washington is on record as favoring a tax cut, but it somehow
never arrives. It won't--until we toss out the malicious doctrine
that keeps tax cuts at bay.
"Revenue neutrality" has turned fiscal policy into, at best, a
pointless exercise; at worst, a deeply dishonest shell game. We
cheer when they propose a low tax, but look at the fine print.
It's accompanied by higher taxes elsewhere. Grant a tax credit
for adoption, and business taxes go up. Cut gas taxes, and other
excise taxes go up. What's next? Cuts in the inheritance tax,
"paid for" by an increase in the gas tax? Maybe the per child tax
credit can be "paid for" by repealing the adoption tax credit.
What is supposed to be purpose of this nonsense? The total
burden of taxes remain the same no matter what. Is it too much to
ask that the federal government take less from the private sector
overall? If so, Republican slogans about cutting the size of
government will be forever empty. You can't cut government
without cutting its income.
The doctrine of "revenue neutrality" is a leftover from George
Bush's 1990 budget agreement, which raised taxes, arguably lost
him the election, and discredited the party. Part of the deal was
that any increase in spending had to be accompanied by an
increase in taxes; likewise, any decrease in taxes had to be
matched by equal decreases in spending.
It sounds reasonable at first to treat the federal budget as
if it were a household. But it's not. The federal budget is a
vast property redistribution machine. Politicians are glad to
"pay for" a tax break by raising taxes elsewhere. It's not coming
out of their income, but ours. The "deficit" is more and more a
fiscal fiction designed to cover this fact.
From the point of view of taxpayers, a tax cut is not
"expensive," but a way of allowing people to keep more of what is
rightfully theirs in the first place. What's expensive is the
idea that taxpayers should be forever on the hook to fork over
the same percentage of the national income year to year.
There's another fallacious assumption behind the doctrine of
revenue neutrality: Congress can predict what people will do
before and after tax changes. In fact, the tax take is strongly
influenced by people's behavior, which in turn is affected by the
marginal rate and the overall level of taxation.
Consider the gas tax. If people cut their driving by 20
percent, the revenue derived from the tax would fall. But is it
possible that deep cuts in the gas tax would cause the price to
fall, increase demand, and thus increase overall revenue? Of
course, but Congress's models don't even consider the possibility
that demand can change when the price changes.
This is true for every tax. If the inheritance tax were cut
dramatically, people's incentive to accumulate property would
increase dramatically. It's even possible that lifetime savings
could go high enough to offset the revenue losses of the tax cut.
So it goes for the income tax and every other excise tax.
But let's say this so-called Laffer Effect doesn't kick in and
total revenue falls. Lower revenue means government has become
less a burden on the American people and the economy is that much
freer. We should be as happy about a falling tax take as we
should be about a falling crime rate. Each makes people that much
more secure in their person and property. A fiscal loss to
government is a property gain to everyone else.
Of course, deficits don't represent the best of all worlds.
They crowd out private investment, tempt the Treasury into
monetizing debt, and drive up interest rates. Balanced budgets,
so long as both spending and taxes are low, are joys to behold.
But the reason we live in the age of deficits isn't because
taxes are too low. Government has been freed from the obligation
to back the currency with gold. It's no coincidence that the last
time the budget was balanced was in 1969, when gold still
restricted the Treasury's ability to pile up debt.
Since then, the deficit has furnished the excuse for Congress
not to do what it should have done, which is lighten the terrible
tax burden borne by individuals, families, and businesses. It is
taxes (not deficits) that have shackled the economy and continued
to frustrate the dreams and ambitions of the middle class.
Besides, deficits are determined by factors over which the
political class has very little control, like economic growth,
the size of the underground economy, and the percentage of people
receiving wages and salaries. Yet every day in this Congress,
Republicans pretend as if they can know for sure what the future
of both taxes and spending portends.
It's time to trash the 1990 budget deal, which must have been
concocted by an evil genius. It's the only budget agreement in
the last two decades that anyone's bothered to adhere to. So long
as this is the case, leviathan will and grow, and the Republican
promise to reduce the size of the government will be merely a
cover for the exercise of political power.
Let's hear less talk about deficits until we are freed from
the tyranny of "revenue neutrality," freed from the desire to
replace one source of revenue with another, and freed from $1.7
trillion budgets. A deficit hawk can keep the rodents away, but
he can also sink his claws into our backs and neutralize us, as
the CIA used to say, with extreme prejudice.
Llewellyn H. Rockwell, Jr. is president and founder of the Ludwig von Mises Institute